Universities feel pinch

Stock market losses and a slowing economy have Northwestern University, the University of Chicago and other schools reconsidering their hiring plans, construction budgets and other programs.

After years of rapid growth, university endowments are shrinking just as an economic slowdown increases the need to help students with tuition aid. Universities rely on endowments and the income they produce from stocks, bonds and other investments to fund up to 25% of operations, including salaries, scholarships and research.

"Universities are now engaging in belt-tightening not seen in a long time," New York-based analyst John Nelson of Moody's Investors Service says.

Locally, the richest schools with the highest percentage of endowment-related spending — Northwestern University and the U of C — have the most to lose.

"Everyone's feeling pressure," says Will McLean, Northwestern's chief investment officer. The university's $7.2-billion endowment, which funds almost 20% of school operations, produced returns of 3% during the 12 months ended in August, compared with 22% in the year-earlier period.

In a university memo last month, Northwestern President Henry Bienen warned: "We will look very closely at any incremental costs, and we are not likely to add new faculty or staff positions."

'EVERYONE IS NERVOUS'

The economy could slow the University of Chicago's campus expansion. Citing the downturn, President Robert Zimmer told a recent faculty meeting that the administration is reassessing priorities and timetables for projects including new labs, science buildings and dorms, according to attendees. "Everyone is nervous," says Michael LaBarbera, a biology professor and speaker for the faculty senate.

In the fiscal year ended June 30, 2007, the $6.4-billion endowment had a net return of 21%. U of C officials refused to discuss recent performance.

"The downturn would have to be large and prolonged over several years before it would have serious impact on the flow of endowment earnings into the operational budget," a university spokesman says.

U of C is heavily invested in hedge funds, which account for 30% of its portfolio, twice the percentage of Northwestern and three times the national average for university endowments.

Increasingly, schools are putting more money into private equity, hedge funds and other "alternative" assets. Those moves fueled huge gains this decade in both the size and performance of endowments. But the market meltdown produced a 5.5% loss for hedge funds in September alone, according to Chicago-based Hedge Fund Research Inc.

During the first nine months of 2008, hedge funds lost more than 10%, the firm says, and could suffer their first annual loss since 2002.

State schools rely less on endowment income, but they won't escape, either. The University of Illinois' endowment has dropped 20% to $1.1 billion since June 30, the school says.

State aid to Illinois public university students has fallen about 40% relative to tuition since 2002, and endowment risks have "exacerbated the existing problem," says Carrie Hightman, chairwoman of the Illinois Board of Higher Education.

Returns on DePaul University's $280-million endowment were a minus 10.2% for the 12 months ended in June and a minus 11% for the three months ended in September. Comparable figures for Loyola's $340-million endowment were a minus 5% and a minus 10%.